Fed Chair Janet Yellen January 2017 Speech Notes

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We are non partisan and base our decisions on factual evidence

“Perhaps because of our shared origins in the Progressive Era, a period of reform in American life, we hold certain values in common. According to your website, the club is nonpartisan and dedicated to the impartial discussion of issues important to your community and the nation. At the Fed, we too are nonpartisan and focused squarely on the public interest. We strive to conduct our deliberations impartially and base our decisions on factual evidence and objective analysis.”

Based on “research and decades of experience” 2% inflation is price stability

“Does price stability mean having no inflation whatsoever? Again, the answer is no. By “price stability,” we mean a level of inflation that is low and stable enough that it doesn’t need to figure prominently into people’s and businesses’ economic decisions. Based on research and decades of experience, we define that level as 2 percent a year–an inflation objective similar to that adopted by most other major central banks.1 Individual prices, of course, move up and down by more than 2 percent all the time. Such movements are essential to a well-functioning economy. They allow supply and demand to adjust for various goods and services. By “inflation,” we mean price changes as a whole for all of the various goods and services that households consume.”

We think the economy is close to meeting our objectives

“In a nutshell, the Fed’s goal is to promote financial conditions conducive to maximum employment and price stability. And I have offered broad-brush definitions of each of those objectives. So where is the economy now, in relationship to them? The short answer is, we think it’s close. The economy has come a long way since the financial crisis. As you know, the crisis marked the start of a very deep recession. It destroyed nearly 9 million jobs, and it’s been a long, slow slog to recover from it. ”

We expect to increase fed funds a few times per year

“Now, many of you would love to know exactly when the next rate increase is coming and how high rates will rise. The simple truth is, I can’t tell you because it will depend on how the economy actually evolves over coming months. The economy is vast and vastly complex, and its path can take surprising twists and turns. What I can tell you is what we expect–along with a very large caveat that our interest rate expectations will change as our outlook for the economy changes. That said, as of last month, I and most of my colleagues–the other members of the Fed Board in Washington and the presidents of the 12 regional Federal Reserve Banks–were expecting to increase our federal funds rate target a few times a year until, by the end of 2019, it is close to our estimate of its longer-run neutral rate of 3 percent.”

Our foot is still on the gas pedal

“The term “neutral rate” requires some explaining. It is the rate that, once the economy has reached our objectives, will keep the economy on an even keel. It is neither pressing on the gas pedal to make the car go faster nor easing off so much that the car slows down. Right now our foot is still pressing on the gas pedal, though, as I noted, we have eased back a bit. Our foot remains on the pedal in part because we want to make sure the economic expansion remains strong enough to withstand an unexpected shock, given that we don’t have much room to cut interest rates. In addition, inflation is still running below our 2 percent objective, and, by some measures, there may still be some room for progress in the job market. ”

Slow productivity growth helps explain why we don’t think dramatic increases are necessary

“The factors I have just discussed are the usual sort that central bankers consider as economies move through a recovery. But a longer-term trend–slow productivity growth–helps explain why we don’t think dramatic interest rate increases are required to move our federal funds rate target back to neutral.”

Economists do not fully understand the causes of the productivity slowdown

“Economists do not fully understand the causes of the productivity slowdown. Some emphasize that technological progress and its diffusion throughout the economy seem to be slower over the past decade or so. Others look at college graduation rates, which have flattened out after rising rapidly in previous generations. And still others focus on a dramatic slowing in the creation of new businesses, which are often more innovative than established firms. While each of these factors has likely played a role in slowing productivity growth, the extent to which they will continue to do so is an open question.2”

We are not trying to help one group over the other savers vs. borrowers

“You might be thinking, what does this discussion of rather esoteric concepts such as the neutral rate mean to me? If you are a borrower, it means that, although the interest rates you pay on, say, your auto loan or mortgage or credit card likely will creep higher, they probably will not increase dramatically. Likewise, if you are a saver, the rates you earn could inch higher after a while, but probably not by a lot. For some years, I’ve heard from savers who want higher rates, and now I’m beginning to hear from borrowers who want lower rates. I can’t emphasize strongly enough, though, that we are not trying to help one of those groups at the expense of the other. We’re focused very much on that dual mandate I keep mentioning.”